SLV Re-entry

Short SLV GTC with a limit order of 37.61 and a buy stop to cover at 41.20 after entry.

The reward to risk is still about 3:1 given the 26.00 area target. I am buying Oct 34 strike put options as well on SLV with no stop loss on the options. Given the target area there is possibility of 300-400% gain on the options so that ratio is good enough.

Updates - Dollar, Gold, Stocks

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The reversal yesterday failed today with acceleration to the downside. The target trendline I have suggested has now been exceeded. So all levels of confirmation of a large upward pattern completing are in place. HOWEVER, that doesn't mean that now is a good time to short. Often times these first moves down after major completions are extremely fast but short lived, giving way to more drawn out counter trend rallies which will provide safer lower risk short-entry opportunities. The target for the head and shoulders top is still below current prices, so maybe we still fall to hit that before a rebound. But, based on historical tendencies of the size and duration of this move we should be very close to a sharp rebound. See the chart for additional notes.

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In early July I had posted that the US Dollar Index may have completed a large downward correction ending with a contracting triangle. The move out of the triangle wasn't strong enough to confirm that though. Now we have the possibility again of a completed pattern with explosive upside to come in this index. This fits with what is going on and expected in commodities right now. We should see pressure downward in gold and silver very soon here I think. Also, the recent patterns suggested in the commodity indexes seem to be unfolding now, so don't look to jump into commodity funds long any time real soon for position traders.

I actually bought some UUP Sept. 21 calls today which should have no problem doubling in value before expiration if this projection is correct. UUP is such a slow moving instrument in absolute value terms that I don't ever trade it, but the liquidity is good, so the options make a good vehicle at major turns.

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Even if the gold trend is still up, prices have hit up against a longer term resistance line, so there should be a pullback here toward the green uptrend line at least. The next chart shows the shorter term picture with a bearish reversal today.

As a side note, while gold has trended upward with stocks for most of this bull market, it traded inversely to stocks most of the last bear market. It gets used as a crisis hedge investment often times. So, we may be at a point here where gold starts to trade inversely to stocks. I really don't have any solid expectations on this, but just understand that the recent correlation can change and may be at a perfect time to do so, as the market moves from inflationary fears, to more deflationary fears if stocks and commodities trend down as the patterns are suggesting right now.

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See chart for notes. Silver is actually a good short or put option buy (Oct expiration) here in my opinion. We should see continued pressure here. I will post a trade on it ASAP. The reward to risk ratio is not as good here as it was on the last entry, but this is what the market is giving, and it still should be pretty good.

SDS Exited

SDS opened at 23.00 which will be the exit price.

So the lower half of the hammer reversal has now been penetrated, which as explained may be expected. However, if the low is broken, then maybe that hammer was just a short backtest of the neckline, and the market will still trend down.

Exit SDS

Place a GTC sell limit order at 22.56 to sell the open SDS trade.

Hammer Reversal in Stocks

I don't have time for charts tonight, but the action today made a wide range very nice looking bullish hammer reversal on the SPY etf. It reversed after undercutting the March lows, which makes a solid chart based buy signal. I am taking this reversal higher very seriously in respect of the dramatic series of down days recently.

There are times like the Nov 2008 break of the Oct 2008 crash low, where once an important prior low breaks, the sell stops are run, and then there is no more selling at that time. This results in a dramatic reversal higher. However, like reversals at the 200 day moving average, it is ultimately a trading algorithm initiated move, which is not always a legit shift in market psychology. So it is possible that after a brief pause today's low gets broken and the head and shoulders pattern continues.

That actually feels unlikely to me. Also, a reversal this strong right under the neckline of the head and shoulders is probably not a good sign for bearish traders. I will have to do a little more looking, but I will likely suggest exiting the long wasting inverse ETF trades still open on the blog. However, if the S&P 500 remains below the neckline for a few days and offers any suggestions that it is likely to break lower, then I will consider re-entry.

FYI...Statistically (according to Steve Nison the candlestick guru) the hammer candlestick has about a 60% chance of having future price action move below the mid point of the tail even on successful bottoming candles. So we may see some further churning here for a day or so, before reversal higher. I think the odds are lower than that in this case, but those are the stats from their historical info.

Early Confirmation of Major Pattern Completion

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A few posts back I mentioned the stages of expected confirmation if the pattern suggested had completed indicating a possible major top in place. The first was for the wave "ii" - "iv" trendline to be broken in less time than wave "v" took to form. That happened. Then wave "v" should be retraced in less time than it took to form. It lagged by about a day, so that was not very clear. Then the entire June-July (i-v) rally should be retraced in less time than it took to form. That basically happened today at least given the completion points of the pattern as I've labeled it. Since this occurred I think we can forgive the slight delay in the retracement of wave v.

The next stage of confirmation is for the dashed downsloping red line to be exceeded in less time than the June-July rally took to form. That has not happened yet, but it seems within reason that it could. Even if it happens by the right edge of the light blue box, that would be decent confirmation.

I obviously would have liked to shorted the market as I felt and noted the pattern was completing, but right now it is late to just jump on if using a defined risk trade. The best opportunity for that should be if there is a brief rally back underneath the neck line of this possible head and shoulders pattern. (see next chart)

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See the notes on the charts for details. Basically this looks like a credible head and shoulders topping formation. Ideally it should stay below the neck line or not close back above the neckline. However, I would expect a backtest from the underside in this case, though that doesn't always happen. If it does back test, the SAFEST way to short is to short it on a break to new lows for the move with a stop above the high of the backtest. Often that break to new lows will be with acceleration, and maybe even a large gap down. So, you could even put the stop tighter if there is a chart based reason to do so.

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Notice the bollinger band configuration right now. The bands are expanding indicating a volatile breakout type move. If there is to be a new downtrend, what should usually happen is for the bottom band to stay pointing down, and the top band to peak and start to trend down also. If the bottom band turns up, then that may indicate the correction is over or nearly so. The prior red and green lines show when the top band turns down after an expanding downside breakout, and when the bottom line turns up, respectively.

The daily chart is pretty oversold right now. Even if the downtrend continues, I think we are almost certain to have a rebound rally (probably quite sharp) within the week.

SPY Update

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After the early morning sell off today, SPY rallied into the close and remains above its 200 day moving average and also above a tight harmonic support zone at 128.21. The hourly chart indicators are very oversold. There is not perfect bullish divergence on them, but this is a reasonable long set-up here with a stop below the June lows. It may be better to wait for a higher swing low on the hourly charts to give some confirmation of a new possible uptrend on this time frame.

At this point I would really need to see a short-term rally before going short/inverse or a break of the March-June neckline followed by a back-test before going short. Daily stochastics are oversold but without divergence right now. So maybe we need some churning here before bottoming, or maybe the market does actually follow through to the downside. But I definitely would NOT jump in short right here.